Why a Capital Lease?

Low down payment
Down payment is 3% to 6% as opposed to 10% to 20% for a bank loan.

Lessee takes depreciation
In a capital lease, the lessee does not get the tax benefits, however, the lessee can depreciate the equipment over the term.

A capital lease is classified and accounted for by a lessee as a purchase and by the lessor as a sale or financing, if it meets any one of the following criteria:

• the lessor transfers ownership to the lessee at the end of the lease term;
• the lease contains an option to purchase the asset at a bargain price (usually $1.00 or
  in California $101.00);
• the lease term is equal to 75 percent or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life); or

A capital lease generally must be reflected on the company balance sheet as an asset and corresponding liability. Generally, this applies to leases where the lessee acquires essentially all of the economic benefits and risks of the leased property. In contrast with an Operating Lease, a Capital Lease is treated by the lessee as both the borrowing of funds and the acquisition of an asset to be depreciated; thus the lease is recorded on the lessee’s balance sheet as an asset and corresponding liability (lease payable). Periodic lessee expenses consist of interest on the debt and depreciation of the asset.

Typically, $1.00 buy-out leases are considered capital leases and is very similar to a financing agreement, meaning that payments are similar to a bank loan. Usually, capital leases are not 100% tax deductible. The equipment is put on a depreciation schedule and written off over
a period of years.

Each company should consult its own tax, financial and accounting advisors to determine the specific tax and acounting treatment of each individual lease and whether it meets the company's needs.